Sunday, May 29, 2011

Germany's Der Spiegel seems hell bent on getting sued to hell and back by Greece. After a few weeks ago it "broke" the news of a secret meeting that would consider the expulsion of the country from the Eurozone, it is once again stirring passions with an article claiming that Greece has missed all fiscal targets agreed under its bailout plan, according to a mission from an international inspection team, putting further funding for Athens at risk, Reuters summarizes. "The troika (aka the International Monetary Fund,the European Commission and the European Central Bank) asserts in its report to be presented next week that Greece had missed all its agreed fiscal targets," weekly Spiegel magazine reported in a prerelease. In other words, this could be the political game over for Greece, whose fate as has been disclosed recently, is intimately tied with the perception that it is following the troika's demands for fiscal change. If the three key bailout institutions are already leaking that Greece is done, next week could well be the beginning of the end for the €. In about 48 hours, even as America is enjoying a Monday off (or precisely because to that, to avoid a market panic), the European market could be digesting a very bitter pill of testing just how well pre-provisioned all those German, French and Dutch banks really are.

Saturday, May 28, 2011

For nearly 30 years we have had two Global Strategies working in a symbiotic fashion that has created a virtuous economic growth spiral. Unfortunately, the economic underpinnings were flawed and as a consequence, the virtuous cycle has ended. It is now in the process of reversing and becoming a vicious downward economic spiral.

One of the strategies is the Asian Mercantile Strategy. The other is the US Dollar ReserveCurrency Strategy.

These two strategieshaveworked in harmony because they fed off each other, each reinforcing the other. However, today the realities of debt saturation have brought the virtuous spiral to an end.

One of the two global strategiesenabled theAsian Tigersto emerge and grow to the extent that they are now the manufacturing and potentially future economic engine of the world.

The other allowed the US to live far beyond its means with massive fiscal deficits, chronic trade imbalances and more recently, current account imbalances. The US during this period has gone from being the richest country on the face of the globe to the biggest debtor nation in the world.

First we need to explore each strategy, how they worked symbiotically, what has changed and then why thevirtuous cycle is now accelerating into a vicious downward spiral.

Friday, May 27, 2011

"Events in Greece have brought the euro area to a crossroads: the future character of European monetary union will be determined by the way in which this situation is handled." Jens Weidmann, Bundesbank president and European Central Bank governing council member, Hamburg, May 20.

By rights, the ECB could have abandoned Greece long ago. Nothing in the rule book says it must prop up countries at risk of economic collapse. If anything, the architects of the monetary union, launched in 1999, envisaged the opposite. Because members would share a currency but not spending and tax policies, governments were meant to take responsibility for their own finances –the "no bail-out" principle was enshrined in a European Union treaty. Logically, a nation that flouted the rules as recklessly as Greece should be left to its fate.

Faced in recent weeks, however, with the renewed fears of a Greek default, the ECB has balked. With increasing vehemence, the euro's monetary guardian has warned of catastrophic effects across the 17-country currency union. Jean-Claude Trichet, ECB president –with less than six months before his eight-year term expires –has refused to discuss any debt restructuring for the nation, storming out of a meeting of eurozone finance ministers in Luxembourg this month when it was raised.

His colleagues, including Mr Weidmann of the Bundesbank, have raised the stakes. They warn that if politicians take even a modest step towards a restructuring, the ECB will cut Greek banks off from its lifesaving liquidity supply, triggering a financial collapse that would push the country's economy into the abyss. It is the central bank equivalent of nuclear deterrence: defy us and we will blow up the world.

Thursday, May 26, 2011

For every investor in the Western world who sells an ounce of gold, picture a multitude of eager buyers in the East who are thrilled by the long-term investment opportunity.

Though not a particularly technical means of understanding the complex dynamics of global supply and demand for gold, that image does illustrate an important aspect of the bullish trend for gold demand that continues to play out on the world's stage.

Much has been made recently of the decision by George Soros to sell the vast majority of his fund's stake in the SPDR Gold Trust (NYSE: GLD) during the first quarter of 2011, emboldening the predictable chorus of bubble babble that plays incessantly in the background behind gold's symphony of sustained upward momentum. But while Soros and several other fund managers were busy locking in impressive gains from gold, an incredible surge in gold demand from Asia continues to pave a rising concrete floor beneath long-term gold prices.

The World Gold Council released its quarterly review of global demand last week,which revealed that China's total investment demand surged an astonishing 123% over the prior-year quarter to oust India from the No. 1 position with 90.9 tons of demand. Thanks to a world-dominating market for gold jewelry, India retains the lead for total gold demand, but the growth trend visible from China strongly suggests an imminent ascent to become the world's foremost market for physical gold.

Tuesday, May 24, 2011

After the fiasco of Collateralised Debt Obligations, anything the clowns of the credit-rating agencies have to say about Europe's sovereign debt crisis deserves to be taken with a sack full of salt.

Unfortunately, continued use of ratings for regulatory and asset allocation purposes ensures they remain as powerful a force as ever.

Having largely failed to warn about the dangers of eurozone debt, Standard & Poor's has upheld a long tradition of making a bad situation worse by putting Italy on negative credit watch, thereby generating a fresh bout of nerves in already dangerously unsettled markets. There were other contributing factors, obviously, but S&P's missive scarcely helped.

To repeatedly – and ridiculously, given that the horse has long since bolted – downgrade Greece, Ireland and Portugal is one thing, but to target Europe's third-largest economy is another entirely. Spain and Italy had been regarded as relatively stable, but both are now being made to look ever more vulnerable. For either of them to be denied access to markets would surely test European appetite for bail-outs to breaking point.

It's no part of a rating agency's job to support the euro, but actually Italy makes an odd choice to be put on negative watch. True enough, the country already has very high net public indebtedness at some 116pc of GDP. The crisis of the past three years has wiped out all the work Italy achieved in the previous decade in managing down its debt.

Yet if the eurozone periphery crisis is seen as essentially a banking crisis which has transmogrified into a sovereign debt crisis, then Italy has little to worry about. Its banking sector is quite small relative both to others and to the size of the Italian economy.

Friday, May 20, 2011

China overtook India to become the largest market for gold bars and coins in the first quarter of this year, as rising inflation inspired a surge in bullion investment.

Chinese investors bought 93.5 tonnes of gold between January and March in the form of coins, bars and medallions, a 55 per cent increase from the previous quarter and more than double the level of a year earlier, according to data released by the World Gold Council on Thursday.

The surge in Chinese buying has supported prices, even as some investors in the west were cutting exposure to gold amid expectations that improving economic conditions and rising interest rates would mark an end to the gold rally.

George Soros's hedge fund sold almost all its holdings in the largest gold exchange-traded fund, SPDR Gold Shares, in the first quarter, according to a regulatory filing this week.

"You're seeing eastern demand picking up any of the gold coming out of the hands of western investors," said Marcus Grubb, managing director for investment at the World Gold Council, a lobby group backed by the gold mining industry.

India, the top buyer of gold jewellery, remains the largest overall consumer of the yellow metal, although Chinese jewellery consumption is rising rapidly.

Thursday, May 19, 2011

The European Central Bank has criticised proposals for a possible restructuring of Greek sovereign debts, laying bare a behind-the-scenes row between ECB technocrats and European Union politicians over Greece’s debt crisis.

The ECB officials warned that any move to delay repayments would be a dangerous distraction from Athens’ economic and fiscal reform plans.

This month Jean-Claude Trichet, ECB president, walked out of a meeting hosted by Jean-Claude Juncker, Luxembourg’s prime minister. According to people familiar with events at the meeting, Mr Trichet was angry at talk of a so-called “soft” restructuring that could involve an extension of Greek debt maturities.

After a meeting of eurozone finance ministers on Monday, Mr Juncker said a soft restructuring of Greek debt would be an option once Athens had taken further steps to bring its public finances under control.

Lorenzo Bini Smaghi, an ECB executive board member, responded on Wednesday, saying: “Given how markets work, one should beware of using meaningless phrases, as Greece will then have to pay a price.”

The ECB fears a soft restructuring would be seen as a precursor to a “hard” restructuring and spook markets across the eurozone. ECB officials instead want Greece to accelerate its privatisation programme. Mr Bini Smaghi said Athens needed to “convince its citizens to pay taxes” and “retire at 65 as everyone else does in the western world”.

Wednesday, May 18, 2011

The American pharmaceutical system is a highly controlled apparatus for restricting access to much-needed drugs and violating the rights of those who want to purchase them. This has long been true.

Vast amounts of those drugs that people should be permitted to purchase of their own free will are withheld from the market. Instead, people who know what they need are forced first to fork over to a physician — who then gets overpaid by insurance — then part of the buck is passed to the overtrained checkout clerks at the pharmacy. We are all treated like babies in order to sustain and fund an industry filled with bamboozlers in white coats.

The commercial Internet in its early days (perhaps 1998 to 2008) represented a wonderful alternative to this apparatus. Suppliers all over the world popped up to give us what we want, bypassing the whole cage of government regulations and private monopolists who rule them like prison wardens. You know what you need, so just click and buy it!

So the pharmaceutical industry solicited the help of government. Together, they worked to crack down on "counterfeit" medicines — meaning the real thing that bypasses patent restrictions and supplier monopolies. In their view, people must not be allowed to get prescription medications without doctor approval — or else an entire fake industry could collapse. So they banded together and instituted a medieval guild system for the digital age.

Sunday, May 15, 2011

Political union frays at the edges as tensions and resentments rise ahead of a critical meeting on Monday on the debt crisis in Greece and a bail-out for Portugal.

An undercurrent of anger, suspicion and mistrust will per-meate on Monday night's critical meeting of eurozone ministers in Brussels as they grapple with a spiralling Greek debt crisis and try to seal a €78bn (£69bn) bail-out for Portugal. As if the euro's problems were not enough, seething resentments will add a new political dimension to the talks.

The inclement mood was set 10 days earlier beside a gently babbling brook and old water mill that speaks of Europe's troubled past. On Friday May 6, Jean-Claude Juncker, Luxembourg's prime minister and the chairman of the eurogroup of single currency members, called a secret meeting of the European Union's most powerful countries at the picturesque Chateau de Senningen on the outskirts of the tiny Duchy state.

Gathered at the 18th century former paper mill, which served as an artists' retreat during the Nazi occupation, were finance ministers from Germany, France, Italy and Spain – the euro's G20 members, Jean-Claude Trichet, president of the European Central Bank (ECB), and Olli Rehn, EU commissioner for monetary affairs. Top of the agenda was the fate of Greece, after the International Monetary Fund (IMF) – on the hook for €30bn of the original €110bn rescue –demanded that the EU come up with a new strategy as the Mediterranean country continued to plunge into debt and recession.

Sparking rumours that Athens was set to leave the euro, George Papaconstantinou, the Greek finance minister, was summoned to Senningen to explain how his country could take further savage austerity measures and speed up privatisation of lucrative state-owned industries.

As news of the meeting leaked out, financial markets went into spasm sending the euro into a nosedive. In a desperate bid to end the turmoil, Mr Juncker, who had not informed other eurozone finance ministers of the meeting, chose to lie. "I totally deny there is a meeting," said his spokesman, as speculation mounted. Mr Juncker had already horrified many of his counterparts by openly bragging last month that he often "had to lie" to suppress public debate over eurozone econo-mic policies which, he claimed, were too important for open contemplation.

"I am for secret, dark debates," he said. "When the going gets tough, you have to lie."

Saturday, May 14, 2011

NEW YORK (CNNMoney) -- Home prices continued to plummet during the first three months of 2011, falling 4.6% from a year earlier.

The U.S. median price, according to the National Association of Realtors (NAR), dropped to $158,700 for a single family house. Condo prices fell even harder -- 10.4% to $152,900.

The median home price has now slumped 30% from its 2006 high of $227,100, and prices have fallen nearly 7% so far this year.

"We're seeing prices dropping faster than they did in 2010," said Pat Newport, an analyst with IHS Global Insight. "That's troubling. Falling home prices precipitated the recession and are slowing the recovery."

NAR blamed much of the latest price drop on sales of foreclosed properties. These "distressed" property sales accounted for 39% of the market, up from 36% from a year earlier.

Distressed properties, often in poor condition and are priced to move, sell for about 20% less than conventional home sales.

The market for distressed properties may further expand over the next few months. Falling prices have sent more mortgage borrowers underwater, owing more on their mortgage balances than their homes are worth. That makes them more likely to default on loans.

Wednesday, May 11, 2011

IN FEBRUARY 1993, as the fledgling Clinton administration grappled with the nation’s budget woes, campaign adviser James Carville groused to The Wall Street Journal: “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everyone.” If Carville were serving in the Obama administration today, he’d be seeking reincarnation as Bill Gross. The founder and co–chief investment officer of PIMCO, Gross runs his firm’s Total Return Fund—the world’s largest mutual fund, with holdings entirely in bonds. And for some time, he has been an outspoken critic of U.S. economic policy.

Gross demurred when I suggested that James Carville might want to be him. “I thought the remark was striking at the time,” he said, “but no, I didn’t feel that they were catering to us at every turn.”

But Democrats wrestling with the legacy of Ronald Reagan’s deficits resented the influence of what the analyst Ed Yardeni had dubbed “the bond vigilantes”: the investors who enforce fiscal and monetary discipline when governments won’t. If your political system inflates its currency, or fails to align its spending with its tax revenues, the bond vigilantes will raise your interest rates until you either get it together … or catapult into a crisis.

Monday, May 9, 2011

Yusuf Raza Gilani will seek to restore some dignity in an address to the nation after the humiliation caused when American forces killed Osama bin Laden at a compound close to Pakistan's main military academy in Abbottabad last week without alerting Pakistan.

A senior government source close to the prime minister said while Mr Gilani will take an aggressive stand to shore up the government's position.

The source said: "The Prime Minister will say that the United States should not have bypassed Pakistan. We have made a huge contribution in fighting terrorism. We've arrested close to 100 al-Qaeda people, including Khalid Sheikh Mohammed.

"We'll take appropriate action if any further violation takes place. We will defend our air space by any means we have."

He will say that Washington's decision to launch the raid without consulting Islamabad had plunged military and political relations between the frosty allies to a new low.

Sunday, May 8, 2011

A 20 year chart of the US 30 Year Treasury Bond vs. a broad commodity index is the occassion to make several macroeconomic observations. The comparison reveals how the purchasing power of the long-dated US Treasury Bond has fared against a basket of commodities over the period. Tracking the ability of the US Treasury bond, denominated in US Dollars, to maintain its viability as a capital storage unit is not arcane. Rather, it is central. All institutions and individuals eventually use financial assets to purchase energy, natural resources, and labor. | see: 30 Year Treasury Bond by Price vs. The Reuters CRB Index–CCI Continuous.

Monday, May 2, 2011

United States has killed al Qaeda leader Osama bin Laden and recovered his body, according to numerous media reports May 1 citing U.S. officials. U.S. President Barack Obama is scheduled to make an announcement on the subject. It is not clear precisely how bin Laden was killed or how his body was recovered, but the assertion that he is dead is significant.

Bin Laden had become the symbol of al Qaeda, even though the degree to which he commanded the organization was questionable. The symbolic value of his death is obvious. The United States can claim a great victory. Al Qaeda can proclaim his martyrdom.

It is difficult to understand what this means at this moment, but it permits the Obama administration to claim victory, at least partially, over al Qaeda. It also opens the door for the beginning of a withdrawal from Afghanistan, regardless of the practical impact of bin Laden’s death. The mission in Afghanistan was to defeat al Qaeda, and with his death, a plausible claim can be made that the mission is complete. Again speculatively, it will be interesting to see how this affects U.S. strategy there.

Equally possible is that this will trigger action by al Qaeda in bin Laden’s name. We do not know how viable al Qaeda is or how deeply compromised it was. It is clear that bin Laden’s cover had been sufficiently penetrated to kill him. If bin Laden’s cover was penetrated, then the question becomes how much of the rest of the organization’s cover was penetrated. It is unlikely, however, that al Qaeda is so compromised that it cannot take further action.

At this early hour, the only thing possible is speculation on the consequences of bin Laden’s death, and that speculation is inherently flawed. Still, the importance of his death has its consequences. Certainly one consequence will be a sense of triumph in the United States. To others, this will be another false claim by the United States. For others it will be a call to war. We know little beyond what we have been told, but we know it matters.

The United States has killed al Qaeda leader Osama bin Laden and recovered his body, according to numerous media reports May 1 citing U.S. officials. U.S. President Barack Obama is scheduled to make an announcement on the subject. It is not clear precisely how bin Laden was killed or how his body was recovered, but the assertion that he is dead is significant.

Bin Laden had become the symbol of al Qaeda, even though the degree to which he commanded the organization was questionable. The symbolic value of his death is obvious. The United States can claim a great victory. Al Qaeda can proclaim his martyrdom.

It is difficult to understand what this means at this moment, but it permits the Obama administration to claim victory, at least partially, over al Qaeda. It also opens the door for the beginning of a withdrawal from Afghanistan, regardless of the practical impact of bin Laden’s death. The mission in Afghanistan was to defeat al Qaeda, and with his death, a plausible claim can be made that the mission is complete. Again speculatively, it will be interesting to see how this affects U.S. strategy there.

Equally possible is that this will trigger action by al Qaeda in bin Laden’s name. We do not know how viable al Qaeda is or how deeply compromised it was. It is clear that bin Laden’s cover had been sufficiently penetrated to kill him. If bin Laden’s cover was penetrated, then the question becomes how much of the rest of the organization’s cover was penetrated. It is unlikely, however, that al Qaeda is so compromised that it cannot take further action.

At this early hour, the only thing possible is speculation on the consequences of bin Laden’s death, and that speculation is inherently flawed. Still, the importance of his death has its consequences. Certainly one consequence will be a sense of triumph in the United States. To others, this will be another false claim by the United States. For others it will be a call to war. We know little beyond what we have been told, but we know it matters.

Each evening, as darkness descends on Athens, police in riot gear wait in buses that line the side streets of the city centre. Some fidget with mobile phones, others stare into the night. What they are waiting for, nobody is sure. But everyone in the Greek capital agrees something could happen any time.

A year after agreeing a €110bn European Union and International Monetary Fund bail-out and economic reform plan, times are hard. Greece is in deep recession: its economy contracted by 4.5 per cent last year; a further 3 per cent fall is expected in 2011. The capital's boarded-up shops and piles of uncollected rubbish testify to the scale of the economic shock and the angry mood of trade unionists.

Beyond Greece, fears are intensifying that the socialist government of George Papandreou –scion of a family that produced two previous left-of-centre prime ministers –will fail to modernise the country's sclerotic economy, or even bring it close to rivalling European peers.

If Mr Papandreou fails, policymakers in other European capitals and Washington will face a dilemma –whether to give Greece another chance or let the country fall into the abyss of default, with potentially devastating consequences on financial systems and economic confidence across the eurozone. The risk premium demanded on Greek debt by international investors has rocketed. Greece's banks are scurrying to shore up their finances.